Everything to fear in Internet sales tax

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If truth-in-labeling rules applied to Congress, the proposed law giving states the power to collect sales tax from out-of-state online retailers would be named the Marketplace Unfairness Act.

Sponsored by Wyoming Senator Mike Enzi and fast-tracked to the Senate floor this week, the legislation would strip away protections that have been in place for decades, unleashing tax-hungry states on merchants to whom they aren’t answerable and tilting the playing field against small Internet retailers.

Under existing law, any state can require businesses within its borders to collect sales taxes from their customers. That applies to shops on Main Street as well as to vendors doing business by mail and over the Internet. If you’re a seller physically operating within the Commonwealth of Massachusetts, for example, part of your job is to collect the requisite Massachusetts tax each time you ring up a sale in the state. At the same time, you can’t be conscripted into serving as a tax collector for states to which you have no physical connection. The Supreme Court has repeatedly affirmed that merchants must have a “substantial nexus” with a state — such as offices, a warehouse, or a sales force — before they can be compelled to collect taxes on that state’s behalf.

In practice this means that a brick-and-mortar retailer only has to calculate the sales tax charged by its own state. A bookstore at the Cape Cod Mall collects the Massachusetts sales tax of 6.25 percent; it makes no difference whether the customer at the cash register lives across the street or across the country. Online and mail-order retailers play by the same rules: If they have a physical presence in Massachusetts, they’re responsible for any sales tax payable to Massachusetts. Neither traditional retailers nor Internet retailers are obliged to collect taxes for states they don’t operate in. Fair’s fair.

But if Enzi’s bill becomes law, fairness goes up in smoke. Online merchants would become revenue collectors for every sales-tax jurisdiction in America — an estimated 9,600 of them, each with its quirks and quiddities. No longer would Internet retailers based in Massachusetts be liable only for sales taxes owed to Massachusetts. They would have to calculate and remit taxes owed to Tennessee and California and Wyoming and New Jersey, charging different levies for different customers, and somehow keeping up with the ever-shifting kaleidoscope of sales-tax rates, definitions, exemptions, and deadlines.

Yet the owner of the brick-and-mortar shop around the corner would go on as before, charging only a single tax rate and remitting taxes to only a single state.

Supporters of the legislation promise that this will all be less onerous than it sounds. The bill includes simplification mandates such as free tax software, and it encourages multistate cooperation in streamlining tax rates and centralizing revenue collection. MarketplaceFairness.org, a website created to promote the Enzi plan, offers the assurance that with modern technology, Internet retailers have nothing to fear. “Keeping track of a few thousand local tax rates,” it says soothingly, “is no longer an insurmountable technical, administrative, or financial burden.”

For mammoth retailers like Amazon or Walmart, the prospect of juggling “a few thousand local tax rates” may not be an intolerable burden. For countless smaller online businesses, however, it could be the kiss of death. And what happens when the technology turns out not to be quite as cheap and easy as advertised? Writing in the Wall Street Journal last summer, Overstock.com’s CEO, Patrick Byrne, and president, Jonathan Johnson, warned against complacency.

“It took our team of 20 to 30 experienced IT professionals 9,412 hours over five months to install, test, and integrate the software that let us properly calculate use tax in one additional state. The annual software license fees for the first year, the internal and external development and installation costs, and the cost of collateral hardware and software came to $1.3 million. And that’s just for one state.”

Whatever inequities may exist in the current system, the proposed legislation would be much worse. There is a crucial reason why merchants have been required to collect taxes only for states with which they have a “substantial nexus.” Anything else would be taxation without representation. States cannot be allowed to reach beyond their borders, imposing tax obligations on retailers who had no vote in the matter, no political recourse, no opportunity to be heard. Against such antidemocratic unfairness, Americans once fought a revolution.

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